Gold has spiked recently following the global concerns of growth as well as OPEC’s lack of concession to cut oil production. During this uncertainty, the VIX and safe-haven assets such as gold and US Treasuries rose. Yields fell and the dollar followed.
Technically speaking, gold is nearing 70 on the RSI oscillator meaning it’s overbought. MACD is on the rise near 3 meaning gold still has room/momentum to go north before retracing from its breakout above resistance. Volume has fallen. Gold’s rise with declining volume means its upward trend is weakening.
Gold is relevant to talk about given its historic pattern of anticipating inflation or deflation. It does not react to inflation, it anticipates it. Gold peaked in January of 1980 when inflation was very high and correctly anticipated the coming dis-inflationary period of the mid 1980’s.
Gold’s recent spike is not a primary trend reversal in my opinion. The reason is because gold has a strong inverse relationship to the dollar. The dollar is currently in a bullish primary (long-term) trend which is dis-inflationary. This signals gold’s lower probability of reversing its current primary downward trend. Gold needs an inflationary environment (dollar down on long-term basis) in order for a long-term bullish trend to occur in gold. Global Demand and growth are waning allowing greater conviction that the recent rise in gold is not a primary trend reversal to the upside.
John J. Murphy’s book, Intermarket Technical Analysis states, “During periods of falling inflation, stocks outperform gold by a wide margin (1980 to 1985 and 1988 through the first half of 1989).”
When you look at the spread between gold and the stock market today you can see it has widened quite extensively on a long-term-basis. Visual is on next page.
When looking for a reversal in gold, look first to a weakening dollar given the fact that a weakening dollar would signal inflation would be on the rise.
Jos. G. Sellery